the firms debt is 9 percent the cost of stock is 15 percent the tax rate is 40

The firms debt is 9 percent the cost of stock is 15

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the firm’s debt is 9 percent, the cost of stock is 15 percent, the tax rate is 40 percent, and the firm’s weighted average cost of capital (WACC) is 10.9425 percent. Given this information, determine the firm’s after-tax cost of preferred stock (rP).A.9.35%B.9.85%*C.10.35%D.10.85%E.11.35%WACC = .109425 = (.09)*(1-.4)*(.35) + (rP)*(.15) + (.15)*(.50)rP= (0.109425 - 0.0189 - 0.075) / .15 = 10.35%53.Assume that you have collected the following information regarding your company:The company’s capital structure is 60 percent equity, 40 percent debt.The company’s forecasted capital budget for the coming year is $12,000,000. The before-tax yield to maturity on the company’s bonds is 7 percent and the bonds are selling at par value – you may ignore flotation costs.The company’s dividend next year is forecasted to be $1.25 a share. The company expects that its dividend will grow at a constant rate of 6 percent a year. The company’s stock price is $20.The company’s tax rate is 40 percent.The company anticipates that it will add $4,500,000 to its retained earnings account over the coming year, but that it will also need to raise new common stock over the year. Its investment bankers anticipate that the total flotation cost for new common stock will equal 12.50 percent of the amount issued (or price per share) -- you may assume that the company accounts for flotation costs by adjusting the component cost of capital (i.e., it determines a price that it will net and then uses a DCF approach to determine re). Given this information, determine what the company’s average cost of capital will be for the entire $12,000 to be raised.Old Exam Questions - Cost of Capital - SolutionsPage 40 of 42 Pages
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A.10.33%B.8.68%C.9.78%D.10.88%*E.9.23%rd= 7% (given)AT rD= (7%)*(1-.4) = 4.2%rS= [D1 / P0] + grS= [$1.25 / $20] + 0.06 = 12.25%re= [D1 / P0(1 - F)] + gre= [$1.25 / $20(1 - 0.125)] + 0.06 = 13.14%Amount to be Raised:Debt = ($12,000,000)*(.40) = $4,800,000Retained Earnings = $4,500,000 (Given)New Equity = ($12,000,000)*(.60) - $4,500,000 = $2,700,000Weights of Total to be Raised:Debt = $4,800,000 / $12,000,000 = 40%Retained Earnings = $4,500,000 / $12,000,000 = 37.50%New Equity = $2,700,000 / $12,000,000 = 22.50%Average Cost = (4.2%)*(.40) + (12.25%)*(.375) + (13.14%)*(.225)Average Cost = 1.68% + 4.59375% + 2.9565% = 9.27025% = 9.23%54.Assume that you have collected the following information regarding your company:The company’s capital structure is 60 percent equity, 40 percent debt.The company’s forecasted capital budget for the coming year is $15,000,000. The before-tax yield to maturity on the company’s bonds is 9 percent and the bonds are selling at par value – you may ignore flotation costs.The company’s dividend next year is forecasted to be $1.25 a share. The company expects that its dividend will grow at a constant rate of 6 percent a year. The company’s stock price is $20.The company’s tax rate is 40 percent.The company anticipates that it will add $4,500,000 to its retained earnings account over the coming year, but that it will also need to raise new common stock over the year. Its investment bankers anticipate that the total flotation Old Exam Questions - Cost of Capital - SolutionsPage 41 of 42 Pages
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cost for new common stock will equal 12.50 percent of the amount issued (or price per share) -- you may assume that the company accounts for flotation costs by adjusting the component cost of capital (i.e., it determines a price that it will net and then uses a DCF approach to determine re).
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